Bank of Canada's 2 percent inflation target renewed

OTTAWA (Reuters) - The government and the Bank of Canada agreed on Tuesday to renew without change the central bank’s five-year mandate to target a 2 percent overall inflation rate.

That contrasts with the dual mandate of the U.S. Federal Reserve to target inflation and employment. The Bank of Canada had examined and rejected the idea of lowering the inflation target and also of targeting price levels instead.

A joint statement from the government and Bank of Canada made no mention of adding financial stability to the calculations when setting monetary policy.

However, Bank of Canada Governor Mark Carney has increasingly spoken - most recently in London on Tuesday - about the need for flexibility in terms of how quickly inflation must return to the bank’s target. Put in another way, that could mean some flexibility in how long deviation from the target would be permitted.

“The experience of the global economic and financial crisis underscored the value of Canada’s flexible inflation-targeting framework,” the statement said.

“The inflation-targeting framework, prudent fiscal policy and a sound domestic financial system have helped ensure that Canada has been one of the strongest performing advanced economies during and following the global economic and financial crisis.”

The statement noted that Canada was the only member of the Group of Seven leading industrialized nations to have recovered all of the output and all of the jobs lost during the recession.

The renewed mandate aims to keep the overall 12-month inflation rate within a range of 1 to 3 percent, as before.

The latest Canadian inflation data, for September, shows inflation at 3.2 percent, outside the target range, but the Bank of Canada projects it will fall to 1 percent in the second quarter of 2012 before returning to 2 percent 18 months later.

On the surface, the concept of targeting price levels instead of inflation rates would have been largely the same, aiming at prices that would grow at 2 percent a year.

But a price-level scheme would have required the bank to compensate for past misses, whereas under inflation targeting bygones are bygones. Bank research had shown the price-level scheme might be too complicated to get across.